Analysis: US-led IMF reform could boost China’s influence

According to Reuters, on Tuesday last week the Obama Administration “asked Congress for authority to implement historic voting reforms in the International Monetary Fund that boost the influence of emerging economies like China in the global financial institution”. The quota reform was agreed in 2010, but in order to become effective it needs approval from the US Congress.

The IMF website reports that the 2010 reform would include three major changes. There would be an “unprecedented doubling of quotas and a major realignment of quota shares”, shifting more than 6 percent from over-represented to under-represented members. The reforms would “protect the quota shares and voting power of the poorest members”. Finally, “an amendment to the Articles of Agreement that would facilitate a move to a more representative, all-elected Executive Board.”

The IMF was created in 1945 and reflected the international reality at the time: it was designed to suit the interests of the countries which had emerged as world powers from the Second World War. Its voting system is based on the amount of money which every country provides and the US has over 16 per cent of the votes: as approving decisions requires a 85 per cent majority, Washington has de facto veto power. For decades, the structure of the institution has held steady, but globalization is now creating pressure for change as the voting system becomes increasingly outdated, over-representing America and Europe and under-representing rising new players. The latter, whose movement is headed by the BRICS – Brasil, Russia, India, China and South Africa – are now loudly demanding adjustments in the way the Fund takes its decisions.

The 6 percent increase which Obama may propose to the Congress goes in this direction and is supported by a number of influential U.S. intellectuals. In an open letter sent by the Bretton Woods Organization to Senate Majority Leader Harry Reid and House Leader John Boehner, the signatories argue that supporting the IMF “lessens the global fallout and financial instability of affected economies, advances the interests of U.S. business and workers of companies that trade and invest in these countries, and supports American jobs and exports”. Therefore, “continued support will ensure the U.S.’ ability to leverage its economic development dollars and ensure its on-going influence on the IMF”. Among those who signed the document are Alan Greespan, former Federal Reserve chairman, Zbigniew Brzezinski, former security advisor to the Carter Administration, and former World Bank president Robert Zoellick.

However influential these suggestions may be, approval is not secured yet. According to the Reuters’ piece, “the Treasury Department submitted the request as a provision to be inserted into pending legislation to keep the U.S. government funded through September 30 this year [..]. The Treasury sought authority to shift $65 billion in U.S. funding from an IMF crisis fund into U.S. quotas, which determine voting power in the Fund.

The news agency reported that no decision has been made by Democrats on whether to include the IMF request in the Senate version of the funding bill – which is expected to be introduced later this month – and that some officials are concerned that eventual delays may take a toll on the U.S. credibility in the Fund. The proposed reforms were already postponed due to the impending elections in November, which made the topic too sensitive to be discussed.

In the meantime, the atmosphere among vote-seekers in the developing world is becoming tenser. In a 2012 BRICS Summit statement, leaders urged reforms for both the IMF and the World Bank, pointing out that global institutions must reflect changing realities across the world.

In the course of the same summit, BRICS leaders spoke about creating a new bank which would be controlled by developing countries and which would focus on their needs. Speaking to Al Jazeera, Dr Alexandra A Arkhangelskaya, head of the Centre for Information and International Relations at the Institute for African Studies at the Russian Academy of Sciences, said the project would be a “good in terms of a multilateral framework of cooperation” and could “shift the weight of economic power”. She cautioned, however, that operating it would be no easy task, as China’s presence would marginalize others.

According to Bloomberg, Russian Deputy Finance Minister Sergei Storchak linked the creation of the new bank to reforms in the IMF, stating that “practical steps will depend largely on the extent to which the BRICS’ position will be taken on board concerning the allocation of new quotas (in the IMF)” because “BRICS states have reached a level of development that gives them the right to insist on getting their interests respected.”

The need for reforming this institution has also been highlighted by Martin S. Edwards, a professor at the John C. Whitehead School of Diplomacy at Seton Hall University. In an article on Project Syndicate, he criticized Europe’s unwillingness to reduce its voting power and argued that Washington should shift sides from Europe to emerging countries, supporting the latter against the former. “The status quo can only lead to increasing resentment by rising BRIC countries [..]. It is time for the White House to forcefully advocate reform of the IFIs, effectively allying with the BRICS against Europe.”

Broadly speaking, the task of revamping global institutions – not just the IMF, but also the World bank and the UN, where at some point the issue of modifying the composition of the Security Council will inevitably come up – represents a test for the willingness of existing powers to accommodate rising challengers. From this point of view, the increase in BRICS’ voting power at the IMF can be considered a test for possible future power attrition: accepting or excluding the new kids on the block?